Ride the Railroads to Profit with Warren Buffett
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Like the smoke from the engine car chugging away at full throttle, share prices for railroad company stocks are rising again.
Year to date, Union Pacific Corporation (NYSE: UNP) is up 12.55%. For the last month of market action, Union Pacific Corporation has gained 3.80%. On a quarterly basis, both the sales growth (13.85%) and earnings-per-share growth (38.62%) have increased.
Norfolk Southern (NYSE: NSC) has been strong in recent action, too, higher by 8.14% for the month. On a quarterly basis, earnings-per-share growth has risen by 36.79%. For the year, earnings-per-share growth is up 36.14%. The price-to-earnings ratio for Norfolk Southern is bullish at 0.95.
Higher by 8.55% this year, CSX Corporation (NYSE: CSX) is now trading above its 20-day, 50-day and 200-day moving averages. Earnings-per-share growth this year is 23.48%.
Railroad stocks are rising for a variety of factors. The recovery of the home building sector in the United States has increased lumber shipments by 11.8% for the first half of the year. This should be followed by more products that are needed in new homes, which will increase rail traffic. About this, Jeffrey Kauffman, senior research analyst at Stere Agree, stated that, "The implication of stronger lumber shipments is that if homes are getting built then homes are being furnished. That is going to drive inter-modal volume - furniture, PVC piping, and also auto sales can be related to new homes."
Greater coal demand from abroad is also contributing. While coal usage in the United States is declining, exports were at a decades high last year. Coal is the most important commodity carried on railroads in the United States. When the factories of China, India, Japan and other countries recover, coal exports will rebound and climb higher. In 2011, US coal exports rose dramatically: 107,259 thousand short tons of coal were shipped aboard, not only the highest level of coal exports since 1991, but also a greater than one-quarter increase from 2010.
For long term investors, railroad stocks are very attractive buys based on the economic fundamentals of the industry. Freight railroads move 42% of the nation's products. On average, rail transport is three times more energy efficient than that of trucks. The fuel efficiency of railroads has increased dramatically, too. In addition, trucks, moving on congested high-ways, have about 16 times the hazmat release of railroads, as trains move across rail-tracks in less populated areas.
Railroad companies offer double digit profit margins, solid dividend yields and high institutional ownership, bullish signs for those looking for a solid, long term investment.
Norfolk Southern has a profit margin of 17.64% that provides for a 2.55% dividend yield with a payout ratio of around 29%. The average stock on the Standard & Poor's 500 Index offers dividend income of around 2% with the historic payout ratio being about 50%. Obviously, there is ample cash flow for Norfolk Southern to raise its dividend or initiate a stock buyback program to reward shareholders. Institutional ownership by mutual funds, pension groups et al... is close to 70% for Norfolk Southern.
The same holds true for Union Pacific, with a profit margin of 17.42%.. Institutional ownership is over 80%. The dividend yield is 2.03% from a low, low payout ratio of only 29.55%. This dividend needs to be raised.
For CSX Corporation, the payout ratio is even lower at 27.08% with a dividend yield of 2.48%. Its dividend should be increased, too. With an ownership rate of close to 70%, institutional investors like that combination. A profit margin of 15.77% provides another reason.
Warren Buffett is a huge fan of railroads. In 2009, when railroad traffic and share prices plunged, Warren Buffett spent $34 billion to acquire Burlington Northern Sante Fe for the portfolio of Berkshire Hathaway (NYSE: BRK-A). That was yet another masterful example of Buffett's dictum to, "Be greedy when others are fearful." Buffett's investment in railroads has been profitable, as it will be for others with the fundamentals and the financials so strong and improving for the industry.
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